Learn About the Mortgage Insurance Premium Tax Deduction

This deduction was renewed through 2017 and might yet be renewed again

Rural house in Vermont.
••• © Jeff Randall / Photodisc / Getty Images

Mortgage insurance premiums can increase your monthly budget significantly—an additional $83 a month or so at a .5 percent rate on a $200,000 mortgage as of 2018. But these premiums were tax deductible through 2017, and there's still hope for the 2018 tax year as well.  

The Legislative Roller Coaster

The Tax Relief and Health Care Act first introduced the mortgage insurance deduction back in 2006. Congress extended the deduction in 2015 when it passed the Protecting Americans from Tax Hikes (PATH) Act, but the deduction expired on December 31, 2016. The extension was good for only one year. 

Then Congress stepped in again. The Bipartisan Budget Act of 2018 retroactively extended the mortgage insurance premiums deduction again through 2017. This is one of those tax deductions that tends to be resuscitated annually, so keep your eye on the news as 2018 draws to a close and 2019 dawns.

Deductions for mortgage interest and real estate taxes remain safe in 2018, although they've been tweaked a bit under the Tax Cuts and Jobs Act.

Mortgage Insurance 

Lenders typically require private mortgage insurance to secure the debts in the event of default. It's charged to buyers who are unable to or don't want to make down payments of at least 20 percent on property. The insurance policy can be issued by a private insurance company or by the Federal Housing Administration, the Department of Agriculture’s Rural Housing Service, or the Department of Veterans Affairs.

Loans That Qualify 

The mortgage insurance premium deduction applies only to loans taken out on or after January 1, 2007. The insurance policy must be for home acquisition debt on a first or second home. A home acquisition debt is one whose proceeds are used to buy, build, or substantially improve a residence.

You typically can't rent the second home out—you must use it personally, such as a vacation home. You might still qualify a deduction, however, if you treat the second home as an income-producing business asset. Home equity loans don't qualify for the deduction, nor do cash-out refinances. However, refinance loans up to the amount of the original mortgage are covered, however. 

Income Limitations 

Taxpayers who can claim this deduction are middle-income families because it phases out and becomes unavailable at higher income levels.

You're not eligible to claim this deduction if your adjusted gross income exceeds $109,000, or $54,500 if you’re married and filing a separate tax return. The deduction begins “phasing out” at lower income limits: $100,000 for single, head of household, and married filing jointly taxpayers, and $50,000 for married taxpayers who file separate returns.

This phase-out requires that you must subtract 10 percent from the amount of the premiums you paid for each $1,000 that your income exceeds $100,000 or $50,000, whichever number is applicable.

You can find your AGI on line 37 of your 2017 Form 1040 tax return, although it most likely will not be in the same place on the 2018 federal tax return which you would file in 2019 should this deduction get new life yet again. The IRS is issuing a new Form 1040 for the 2018 tax year.

Claiming the Deduction

Mortgage insurance premiums paid during the year are reported on Form 1098. You should receive this form from your lender after the close of the tax year. You can find the amount you paid in premiums in box 4. There’s currently no limit on the amount of the deduction you can claim if you and your loan qualify.

You can deduct this entire amount. Prepaid insurance premiums can be allocated over the term of the loan or 84 months, whichever period is shorter, under a ruling from the IRS announced in Notice 2008-15.

Mortgage insurance premiums are an itemized tax deduction. They're reported on line 13 of Schedule A, "Interest You Paid." You can’t claim the mortgage insurance premiums deduction if you claim the standard deduction—you must itemize using Schedule A. 

And if you missed the boat in 2017 and neglected to claim this deduction although you could have? All isn't lost. You can typically amend your tax return with the IRS for up to three years after you file the original return or two years after you've paid any tax due on that return, whichever is later.

Canceling Your Insurance

It can pay to check your current mortgage balance against your home's fair market value even if it turns out that you can claim a tax deduction for PMI again in 2018. You no longer have to pay private mortgage insurance when your equity in the property exceeds 20 percent, but it's unlikely that either your lender or the insurer will point this out to you.

No one is going to voluntarily cancel your policy for you when you hit this magic number—but you can. Be prepared to have your home appraised or a value otherwise assigned by a professional so you can prove the insurance is no longer required.

Even if it turns out that Congress does not renew the credit again for 2018, you might be able to save some money regardless by taking steps to cancel your policy. 

NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.